According to research carried out in 2019 by the Federation of Small Businesses (FSB), 50,000 small businesses go under every year because of late paying clients.
Although it’s a hard statistic to take, at least it shows you: you are not alone in struggling with this. Overdue payments is the great business crippler.
You most likely doing your very best work, to deadline, every time – but if you’re not getting paid on time too, you’re going to face some cash flow problems. These gaps in payment might leave you without the cash to settle bills or pay employees. It also makes it increasingly difficult to invest in the business and take opportunities that are presented to you.
We don’t want you to be trapped in the negative cash flow cycle, because you’re more than just some yearly FSB statistic. You’re a living, breathing human with bills to pay, a team to keep and mouths to feed. This is a stress you don’t need.
If you’re struggling with this right now, there’s a progression of steps to take. You can’t control your clients actions or reactions, but you can control:
- Your client base – deciding the kind of clients you’ll work with, now and in the future
- Your payment culture – the systems you have in place for getting paid
We’re going to run through these steps, and you can catch on wherever you’re at in your business. Just remember, it can be done and you’re not alone. You can future proof your business against this problem and there are people who can help.
1. Set clear payment terms that work for your business
Your invoice payment terms tell your clients how and when you expect to be paid. Most of the time, business owners set their payment terms at 30 days, because that has traditionally been the norm. But your payment terms don’t have to be the traditional 30 days if it’s hurting your business. Set it for a week or two weeks if needs be.
- Shout about them, and stick to them! State your terms clearly in all new client information, on your website onboarding process. And don’t ‘let people off’. Stay strong.
- Charge interest for a late payment – You can make it very clear in your payment terms the amount of interest you will charge if someone doesn’t pay on time.
- Allow different payment methods – Payments will take longer if you’re using slower payment methods. Allow for direct bank transfers from a variety of banks, PayPal, etc.
- Discuss your payment terms in the sales process – Most clients are happy to talk about the process during the contract conversation. Remember this is your way of doing things.
2. If you’re already using Xero, set it up to help you get paid faster
We only work with Xero. We’ve laid out all the reasons we recommend it over the other options here. If you’re not using it already, have a chat with us to switch over. If you’re already using it, set up these features so you have the basics of fast payments nailed.
- Set up your invoices in Xero (and set them to repeat) – Create a new personalised invoice in Xero and add all the billable items. Set up repeat invoices for the clients you can – it’ll be a huge time saver.
- Add payment details for your clients – You can set Xero up so that clients can pay you instantly online from their invoice. Fast payments!
- Set up your own automatic prompts – Xero has a simple payment chasing email – set it up to automatically email customers to prompt payment.
- Send an invoice on your mobile on the go – Just another way to get a small win. Set up Xero on your mobile, so you can send an invoice as soon as a job is done, wherever you are.
3. Use an app like Chaser to chase late payments automatically
Having a solid process and communicating it well will go some way to preventing clients from feeling relaxed about their payments. Laying the rules out early may also help you see red flags before you take a client on. If they don’t like your process, great! They’re not the ideal client for you. One less chronic late payer!
That being said, do always bear in mind there may be legitimate reasons a trusted client can’t meet the deadline, or is a little late. We’re all human, and there’s a good chance something may be going on in your client’s life that you’re unaware of. This is probably why most business owners are afraid of chasing their payments. You don’t want to upset people, and that’s understandable, and commendable.
Automating a human-centric chasing system can go a long way to taking that stress of your shoulders. Xero does have changing capabilities in the software itself – but if you really want your credit control managed efficiently, we recommend an integrated app called Chaser.
Chaser connects to your accounting system, and lets you generate a string of templates to nudge your customers at various points when a payment is due and overdue. Chaser can be running in the background, and cash can come in, without you needing to remind clients yourself.
We can even support you in managing the payment process, so you’re chasing payments in the most efficient way possible, and knowing expenses are being paid as a result.
4. Invoice factoring could help bridge the cash gap
How it works: An invoice financing provider will lend you money against your customer invoices, in order for you to get the cash value immediately rather than waiting weeks for it.
- If you only need a quick and small amount of finance – go for an overdraft or maybe company credit card.
- If you have more chronic cash flow issues, we recommend looking at invoice factoring – it can be expensive, but if you know you’ve got wages to pay every month and you know you won’t get paid for 90 days, it gives you upfront money.
Factoring invoices is in effect an overdraft secured on your debt. It’s fully legit and there’s no shame in it. Under the right circumstances, we have recommended our clients take advantage of invoice factoring.
For all businesses, there is a danger of growing too quickly. For some, invoice factoring can help prevent you from growing so fast your expenses become too high (without quick enough cash to cover them).
We went through this process with one of our clients, and it ended up being really helpful. In our fourth year of working with Jim at Subvision, we were able to get an invoice factoring agreement in place, in order to help cover the working capital gap as his business grew. This helped Jim out big time, as he was able to fund 80% of his debt up front. A major financial stress was avoided.
Remember, as your turnover grows, so does the amount you can borrow. If you double in size, your expenses will double in size. Costs will go up, wages will go up and you’ll need more cash – and your facility will go up too.
For fast growing businesses, cash really is king
You can have all the turnover, but remember: cash is king. And with a little systems work, and some human support, you can get and keep control of your cash flow.
Whether your growth is stunted by late payments or you’re suddenly finding yourself growing too fast and losing your grasp on your cash, face the music and have the conversation with us. We’re always here to talk to you human to human, so your business doesn’t become a statistic.
Anything in this article, from setting up Xero and apps, to getting funding, to simply having a chat about your processes – we’re here for you.